Advisor's Advice Research Articles

Integrating Incomplete Information With Imperfect Advice.

When our own knowledge is limited, we often turn to others for information. However, social learning does not guarantee accurate learning or better decisions: Other people's knowledge can be as limited as our own, and their advice is not always helpful. This study examines how human learners put two "imperfect" heads together to make utility-maximizing decisions. Participants played a card game where they chose to "stay" with a card of known value or "switch" to an unknown card, given an advisor's advice to stay or switch. Participants used advice strategically based on which cards the advisor could see (Experiment 1), how helpful the advisor was (Experiment 2), and what strategy the advisor used to select advice (Experiment 3). Overall, participants benefited even from imperfect advice based on incomplete information. Participants' responses were consistent with a Bayesian model that jointly infers how the advisor selects advice and the value of the advisor's card, compared to an alternative model that weights advice based on the advisor's accuracy. By reasoning about others' minds, human learners can make the best of even noisy, impoverished social information.

Reflected glory and failure: the role of the medial prefrontal cortex and ventral striatum in self vs other relevance during advice-giving outcomes.

Despite the risks, people enjoy giving advice. One explanation is that giving beneficial advice can result in reflected glory, ego boosts or reputation enhancement. However, giving poor advice can be socially harmful (being perceived as incompetent or untrustworthy). In both circumstances, we have a vested interest in the advice follower's success or failure, especially when it reflects specifically on us compared with when it is diffused between multiple advisors. We examined these dynamics using an Advisor-Advisee Game, where subjects acted as an Advisor to a confederate Advisee who selected one of the three options when trying to win money: accept the subject's advice, accept the advice of a second confederate Advisor or accept both Advisors' advice. Results showed that having one's advice accepted, compared with being rejected, resulted in activity in the ventral striatum--a core reward area. Furthermore, the ventral striatum was only active when the subject's advice led to the advisee winning, and not when the advisee won based on the confederate's advice. Finally, the medial prefrontal cortex (MPFC) was more active when the Advisee won or lost money based solely on the subject's advice compared with when the second Advisor's advice was accepted. One explanation for these findings is that the MPFC monitors self-relevant social information, while the ventral striatum is active when others accept advice and when their success leads to reflected glory.

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The Value of Your IPO Advisor's Advice: An M&A Perspective

This empirical paper addresses the issue of the quality of financial advice given by investment banks regarding firms’ acquisition activities. Motivated by anecdotal and documented evidence on the cases of ”fee generating” motives in advisory business, the hypothesis of the paper is whether the better established contacts of investment bankers with firm’s executives can boost the phenomenon of ”chasing deals” and lead to a larger number of value destroying acquisitions. We investigate whether closer contacts between investment bankers and corporate management established at IPO, lead the firm to perform acquisitions characterized with lower abnormal returns. In this paper, the conjecture is that those banks, who have underwritten company’s IPO issue, have preferential access to its corporate executives, in that the bankers can easily identify and pitch potential takeover targets deliberately and insistently. If the ”fee generating” hypothesis is true, we expect the abnormal returns at acquisitions to be lower for firms that went public with banks actively advising on M&As, and when the underwriter’s current M&A business is deteriorating. In contrast, whenever a firm goes public with an IPO-specialized bank, which does not seek fees from extra M&A advisory, we expect this firm to have higher announcement returns at acquisitions. This paper is the first to our knowledge that analyzes the misalignment of M&A advisory bankers, in a framework of relationship banking emerging during IPO underwriting. The results suggest that there is indeed a negative relation between the aspiration of the underwriter to do advisory business and firm’s stock performance at acquisitions. The results stay robust when controlling for possible endogeneity of strategic choice of the investment banker for IPO. ∗I am grateful to Michel Habib, Alexander Ljungqvist, Lucy White, Alex Edmans, Zsuzsanna Fluck and Gerzensee Doctoral Workshop participants for valuable comments and suggestions. Correspondence: Swiss Finance Institute, Plattenstr 32, 8032 Zurich T. +41 44 6343596 e-mail: plaksen@isb.uzh.ch

Value of Your IPO Advisor's Advice: M&A Perspective

This paper addresses the role of financial advisors in firms' acquisition activities. Motivated by anecdotal and documented evidence on the cases of fee generating motives in advisory business, we test whether the better established contacts of investment bankers with firm's executives can boost the phenomenon of chasing deals and lead to value destruction at acquisitions. We investigate whether closer contacts between conflicted investment bankers and corporate management established at IPO, lead the firms to perform acquisitions characterized with negative market reaction. Bankers, who have underwritten company's IPO issue, have preferential access to its corporate executives, in that the banks can identify and pitch potential takeover targets deliberately and insistently. In line with the fee generating hypothesis, we find that the abnormal returns at acquisitions are lower for firms that went public with banks actively advising on M&A, and when the underwriter's current M&A business is deteriorating.

Tell Me Something I Don't Know

This article examined strategic requests for information in a group structured as a judge advisor system (JAS) with one group member designated as the decision maker and the other two members as advisors. The decision maker could solicit advice from the two advisors. One advisor's advice contained only information shared in common with the decision maker, and the other's advice contained half unshared information. The authors proposed an alternative to research on information sampling and mutual enhancement and predicted that the decision maker would prefer information from the advisor with more unshared information. The decision maker solicited more information from the advisor with more unshared information and rated this advisor's information as more important and influential than the advisor with only shared information.

Factors affecting the acceptance of expert advice

This paper expands research on the judge advisor system (JAS) by examining advice utilization and trust. Experiment 1 examined five factors that could increase utilization of expert advice: judge's trust in the advisor, advisor confidence, advisor accuracy, judge's prior relationship with the advisor, and judge's power to set payment to the advisor. While judge's trust and advisor confidence correlated with the judge matching the advisor's advice, a stepwise regression found that of the five variables, advisor confidence was the only significant predictor of the judge matching the advisor. Experiment 2 examined trust without the role assignment to judge or advisor. While trust expressed in partner was not higher for the judge than the advisor in Experiment 1, in Experiment 2 trust in partner expressed by the low-expertise dyad member was higher than trust expressed by the high-expertise dyad member. Results from the two experiments are discussed in the context of Sniezek and Van Swol (2001).